MOSCOW – An audience of more than 300 heard here last week that Russia is promising ground for lubricant marketers – a big market with growth opportunity and potential for improved margins. But attendees at the second annual Lubricants Russia conference were also told that it promises challenging times for domestic sellers.
Speakers at the event, which was held last Wednesday and Thursday, said that Russias burgeoning economy appears poised to drive growth in lubricant demand that only a handful of countries can match. They added that signs also suggest the beginning of a shift toward higher quality products that would be more lucrative to sell. There seemed consensus that foreign suppliers currently hold an advantage in those upper tiers of the market and that Russian companies will have to work to overcome it.
Organized by local consulting firm RPI Inc. and cosponsored by German additive supplier RohMax Oil Additives and Russian petroleum giant LukOils lubricants business, the conference drew attendees from Russian lubricant suppliers and industry groups, along with industry players from Western and Eastern Europe.
They heard Tamara L. Kandelaki, general director of InfoTek Consulting, profile a market that consumed 1.797 million metric tons of lubricants in 2005, a decrease of 1.9 percent from 2004. She said demand has been almost flat for the past four years, ranging from 1.823 million tons to 1.863 million tons from 2002 through 2004.
Russia produces significantly more lubricants than it needs, Kandelaki said, exporting 1.011 million tons against imports of 225,000 tons. However, 77 percent of the exports are straight base oils, including additive-free industrial lubricants. Imports are largely automotive engine oils for vehicles manufactured by foreign companies.
Russia is the worlds fourth-biggest lubricant market, but speakers at the conference said it is not just the size that makes it attractive. Fuchs Petrolub AG Executive Board Member Georg Lingg noted that Russia is one of four nations – the others are China, India and Brazil – described by financial analysts as the fastest-growing big economies. As Lingg noted, investment firm Goldman Sachs predicts those nations will surpass the combined gross domestic product of the worlds six biggest economies – the United States, Japan, Germany, the United Kingdom, France and Italy – by 2050.
This economic growth means opportunity for lubricant marketers. While global lube demand dropped 1.4 percent between 1995 and 2005, consumption in Brazil, Russia, India and China (referred to collectively as the BRIC nations) grew by 23 percent. Russian demand fell during a recession in the second half of the 1990s, but has undergone a clear recovery since 2000, Lingg said.
Russia had 31.2 million cars, trucks and buses in 2005. That represented a 4.9 percent growth in the vehicle fleet from 2004, but demand for foreign-built vehicles is growing fastest. The number of foreign-built cars and trucks grew 17 percent and 18 percent, respectively last year, to 5.5 million and 4.9 million. Meanwhile, domestically manufactured vehicles have been losing their share of the overall fleet in recent years.
The trend bodes well for foreign lubricant marketers, as purchasers of foreign vehicles generally use imported lubes. Russian lube companies have a hard time competing in that part of the market, where oil quality and margins are highest.
Foreign packaged imports are the biggest threat to Russian [lubricant] companies, Kandelaki said. Its partly because purchases of foreign vehicles is increasing so fast, and buyers of those vehicles want foreign lubricants. But a lot of owners of Russian cars also preferforeign lubricants.
Opinions seemed to vary about how Russian motor oils lag foreign products – and what must be done to close the gap. Maxim Donde, general director of LukOils lubricant arm, LLK-International, suggested the problem is one of perception, that Russian oils may have been inferior in the past but perform on par now
Our main task is to overcome the stereotype of superiority of foreign products, Donde said, adding that Russian companies in other industries, such as candy, have accomplished the same feat. Russian candies today are selling very well, as well as our sausages. They are more tasty than foreign products. Our task is to convince the consumer.
Boris Bunakov, general director of the scientific research institute NAMI-CHIM, contended that quality remains an issue, declaring, No Russian company can supply high-quality oils. NAMI-CHIM develops standards for motor fuels and lubricants.
LLK dominates the Russian lubricant market and was the only domestic supplier with a visible presence at the conference. According to InfoTek, LLK produced 1,119 tons of lubes in 2005, constituting 43 percent of domestic lube production and far out-distancing second-place Yukos, which produced 441 tons.
LLKs Donde agreed that now is an opportune time to be in the Russian market, and he predicted a new wave of plant construction by foreign companies, including lubricant plants, to serve factories built in recent years by automakers and their component suppliers.
We know a lot of [lubricant] companies already have plans, he said.
Donde added that LLK is working on several initiatives to try to improve the industry. One seeks to attract young workers, in order to replace talent lost in the past decade or two. The company is proposing a reduction or elimination of the excise tax that Russia currently places on lubricants. It is also trying to encourage the development of domestic operations to manufacture lubricant additives.